Amount Available For Investment

A program's total offering proceeds are $10 million. Before any money is used to acquire the program's assets, a portion pays underwriting compensation, due diligence fees, and the legal and accounting costs of organizing and marketing the offering. What category of expense does this first portion represent?

1. A.Acquisition costsWrong. Acquisition costs are what the program pays to actually buy its assets, a separate and later use of proceeds.
2. B.Ongoing operating costsWrong. Operating costs are incurred after acquisition to run the assets, not to organize and market the offering itself.
3. C.Organizational and offering expensesCorrect. These are the costs of forming the entity and marketing the offering, paid before any proceeds reach the amount available for investment.
4. D.Working capital reserveWrong. The working capital reserve is set aside for unanticipated operating needs after acquisition, not for organizing or marketing the offering.

Why: Underwriting compensation, due diligence fees, and the legal and accounting costs of organizing and marketing an offering are all organizational and offering expenses -- the costs of bringing the program to market and forming the entity, as distinct from the costs of operating it afterward or acquiring its assets. These expenses are paid out of offering proceeds before any money reaches the amount available for investment. Distinguishing this category from acquisition costs and ongoing operating costs is the basis for reading a program's use-of-proceeds disclosure correctly.

Ridge Capital Program raises $8,000,000 in offering proceeds. Organizational and offering expenses consume $640,000, and the program sets aside a $360,000 working capital reserve, with the remainder allocated to acquiring assets. How much of the $8,000,000 is actually available for asset acquisition?

1. A.$7,360,000Wrong. This subtracts only the organizational and offering expenses and omits the working capital reserve.
2. B.$7,000,000Correct. Subtracting both the $640,000 of organizational and offering expenses and the $360,000 working capital reserve from $8,000,000 leaves $7,000,000.
3. C.$7,640,000Wrong. This subtracts only the working capital reserve and omits the organizational and offering expenses.
4. D.$8,000,000Wrong. This ignores both deductions; neither the expenses nor the reserve are available for asset acquisition.

Why: The amount available for investment equals total offering proceeds minus organizational and offering expenses minus the working capital reserve: $8,000,000 minus $640,000 minus $360,000 equals $7,000,000. Both the organizational and offering expenses and the working capital reserve are funded out of gross proceeds before any money reaches the assets themselves, so both amounts must be subtracted, not just one of them. The $7,000,000 remaining is what the program actually deploys into acquiring the assets investors are buying exposure to.